TMA Hot Topics Panel

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1 TMA Hot Topics Panel LightSquared - Overview 1 I. General Background a. LightSquared, a provider of wholesale mobile satellite communications and broadband services throughout North America, filed for bankruptcy protection on May 14, 2012 after the Federal Communications Commission (the FCC ) suspended LightSquared s license to use its spectrum, or licensed pockets of airwaves used by telecommunications firms to operate wireless networks, to implement a hybrid satellite-terrestrial service to supplement mobile services. The license suspension was the result of the U.S. government finding that the company s network could interfere with global-positioning systems. b. LightSquared currently has negligible operations. The value of the estate lies in its spectrum and is therefore largely dependent upon the Federal Communications Commission s ruling on licensing. LightSquared s advisors Moelis & Co. have valued the Debtor at $7.66 billion, on the assumption that the company will receive FCC clearance for its licenses. II. III. Charles Ergen/Dish Network Corporation Interest in LightSquared a. LightSquared s credit agreement, entered into in order to finance the company s build out of its terrestrial network, contained a provision that prohibited competitors, such as Dish Network ( Dish ), from purchasing its debt. The purpose of the provision was to prohibit LightSquared s direct competitors from acting as lenders. b. Charles Ergen, the founder and chairman of Dish, created a personal vehicle, SP Special Opportunities LLC ( SPSO ), to purchase LightSquared Securities in late 2011 (prior to the bankruptcy filing). Ergen paid $700 million from a family trust for debt worth more than $800 million at par and valued at more than $1 billion, including interest. Ergen maintains that he purchased the debt as an individual investment and not as part of a scheme with Dish. On account of such acquisition, SPSO holds a first-lien claim in the amount of nearly $1 billion. c. Ergen also founded L-Band Acquisition LLC ( L-Band ) to offer to buy LightSquared s prime spectrum for $2.22 billion. After its creation, L-Band was acquired by Dish for $1. The Debtor s Plan a. The Debtor proposed a plan, based on a $2.65 billion exit financing package from Fortress Investment Group and others, pursuant to which all secured creditors, 1 In re LightSquared Inc., et al., Bankr. S.D.N.Y. Adv. Pro. No ; Main Case No (SCC) /90 10/27/

2 with the exception of Ergen, would be paid in full in cash following confirmation of the Plan. Ergen, on the other hand, would receive a third-lien note that will not pay cash for seven years following confirmation (unless it is refinanced) and which provides little in the way of rights and protections. LightSquared would not otherwise be able to finance a plan that would repay Ergen cash in full for his claims, while making the other creditors whole on the terms in its plan b. Ergen voted against the Plan, after which LightSquared sought to disqualify Ergen s vote and terminate or subordinate the claim on account of his alleged improper behavior. According to LightSquared, Ergen s maneuvers caused delays and disruptions that cost the estate $390 million in additional interest, $110 million in administrative expenses and $46 million in legal fees. IV. The Complaint a. LightSquared brought suit against Ergen in November 2013, after dismissal of a similar suit brought by Harbinger Capital Partners, alleging that Ergen improperly bought debt of LightSquared and schemed to derail the bankruptcy. b. Specifically, the Debtor sought the following claims: i. Declaratory relief declaring that SPSO is not an Eligible Assignee under the Credit Agreement; ii. breach of the Credit Agreement by virtue of SPSO s purchase of interests in the Debt when it was not an Eligible Assignee; iii. Disallowance of claim under 11 U.S.C. 502(b) by virtue of the fact that SPSO was not an Eligible Assignee to purchase the debt; iv. Equitable disallowance of claim for SPSO s improper acquisition of the claim as a direct competitor of the Debtor, its concealment of the involvement of DISH and EchoStar in its purchase of the debt and its delay in closing its acquisitions of the debt, thereby joining in the Debtor s capital structure and acquiring a sufficient interest to direct the bankruptcy case; and v. Tortious interference with contractual relations through SPSO s intentional acquisition of the debt when it was not an Eligible Assignee. V. Court s Oral Ruling on May 8, 2014 a. On May 8, 2014, the Court considered and issued an oral ruling concerning (i) the confirmation of the Debtor s Plan, and (ii) the Debtor s motion to terminate or subordinate the claim of Ergen. b. The Claim i. The District Court denied LightSquared s request to terminate Ergen s $844 million claim, but found that LightSquared may equitably subordinate his claim. -2-

3 ii. Although Judge Chapman found that Ergen and SPSO did not strictly break the terms of the credit agreement, she found that their actions were clearly an end run around them, showing a lack of good faith. The Court found that although Ergen began purchasing LightSquared debt before it entered into bankruptcy, by April 2013, when SPSO bought the final $320 million in LightSquared debt to give it a blocking position, it became clear that SPSO was acting on behalf of Dish Network. Accordingly, as a result of such inequitable conduct, the Court found equitable subordination or Ergen s claim is appropriate. iii. The Court indicated that the amount of the claim to be subordinated will be on account of the damage his actions caused to the estate to be determined at a future hearing. c. The Plan i. Court declined to confirm the Debtor s proposed plan, finding it to be a gerrymandered end-around that unfairly discriminates against the approximately $1 billion in claims held by Dish Network Corp. ii. Further, the Court found the valuation of the company to be too uncertain at this time to confirm the plan, as it is dependent upon unpredictable FCC approvals which could result in a valuation of the company ranging from $4 billion to $13 billion. The Court therefore concluded that so long as the regulatory hurdles exist, it is impossible to conclude whether the valuations are sufficient to support treatment of SPSO under the plan. d. The Court gave the parties two weeks, or until May 27, 2014, to resolve the conflict or the Court would appoint Judge Robert Drain as mediator. On May 27, 2014, counsel for the parties reported that they had made progress in reaching a deal, but need help to cross the finish line. Accordingly, the Court appointed Judge Drain to settle on a plan to restructure LightSquared. e. The Court s written opinion concerning the above has not yet been issued. -3-

4 Meridian Sunrise Overview 2 I. Background a. In April 2008, Meridian Sunrise Village LLC ( Meridian ) borrowed $75 million from U.S. Bank for the construction of a shopping center. The loan agreement only permitted U.S. Bank to assign the loan to Eligible Assignees, which were defined to include any Lender or any Affiliate of a Lender or any commercial bank, insurance company, financial institution or institutional lender approved by the Agent and, provided there was no event of default, Meridian. b. U.S. Bank subsequently assigned portions of the loan to Bank of America, Citizen Bank and Guaranty Bank and Trust. c. In 2012, Meridian defaulted under certain debt coverage covenants under the loan agreement. Rather than charging Meridian default interest, U.S. Bank requested that Meridian waive the Eligible Assignee limitations so U.S. Bank could sell the loan. When Meridian declined, U.S. Bank declared that it would begin charging default interest. Merdian thereafter filed for bankruptcy in the Bankruptcy Court for the Western District of Washington (the Bankruptcy Court ). d. Meridian s proposed a plan of reorganization, pursuant to which the Debtor classified one class to consist of the lender group under the loan, including Bank of America, with each member of the group entitled to one vote. e. Bank of America subsequently assigned its interest in the loan to BN Distressed Debt Limited Fund ( BN ). BN thereafter assigned half of its acquired interest to two additional hedge funds (together with BN, the Funds ). II. Procedural History a. Following Bank of America s assignment of its interest to the Funds, Meridian filed an injunction with the bankruptcy court, to prevent the Funds from exercising their rights as members of the lender group to cast three individual votes on the plan of reorganization. Meridian challenged the assignment of the loan interest to the Funds on the grounds that the Funds did not constitute Eligible Assignees under the loan agreement. b. In defending the motion, the Funds argued that they qualified as a financial institution under the terms of the loan and were therefore an Eligible Assignee. c. The Bankruptcy Court granted the injunction finding that BN, as a distressed debt fund, is not a financial institution and was therefore not an Eligible Assignee within the meaning of the loan documents. 2 In re Meridian Sunrise Village, LLC, W.D. Wash. Adv. No , Main Case No (BDL), 2014 WL (Mar. 7, 2014). -4-

5 d. The Funds appealed the ruling to the District Court for the Western District of Washington (the District Court ) on the grounds that the Bankruptcy Court erred in finding that the Funds were not financial institutions and were not permitted to vote on the Plan, and sought a stay of the injunction pending the appeal. The District Court accepted the appeal but denied the stay and the voting on the Debtor s plan of reorganization was allowed to proceed without the Funds permitted to cast a vote. The Plan was approved by the remainder of the Lender group and was confirmed in September e. The District Court, reviewing the matter de novo, affirmed on the grounds that the term financial institution did not contemplate hedge funds. Accordingly, the Court found that the Bankruptcy Court was correct to deny the Funds the ability to vote on the plan. Further, the Court noted that even if the Funds were eligible assignees, they would only be entitled to one collective vote, the casting of which against the plan would not have been sufficient to block confirmation. III. Analysis a. The question presented, as summarized by the District Court, was whether hedge funds that acquire distressed debt and engage in predatory lending were Eligible Assignees of the Debtor s loan obligation under the original Loan Agreement. b. As indicated above, the determination of whether the Funds were Eligible Assignees was contingent upon the appropriate definition of financial institution : i. The Funds argued that the Court should look to the dictionary definition of financial institution exclusively, which define the term as any institution that handles and invests funds, or any entity that manages money. ii. The Debtor argued that the c. The District Court applied Washington state law to construe the term financial institution, to conclude that the term means entities that make loans. To do so, the Court considered both the terms of the loan agreement, as well as the conduct of the parties after its execution. i. The District Court found that under Washington State law principles of statutory construction, the term financial institution must be interpreted consistent with the surrounding terms commercial bank, insurance company, and institutional lender, which the Court found are all entities that deal with money lending. Moreover, the District Court found that, if it were to construe the term as broadly as asserted by the Funds, the remaining terms would have no meaning. ii. The District Court further found the definition advanced by the Funds to be overly broad, as it would allow assignment to any entity that has some -5-

6 remote connection to the management of money, and would have no limiting effect at all. iii. Finally, the District Court found that U.S. Bank s attempt to waive the Eligible Assignee provision served as evidence that the parties to the agreement meant to (and did) limit the list of lenders, and to exclude the assignment to distressed asset hedge funds. d. Accordingly, the District Court found that the Funds were not Eligible Assignees and affirmed the ruling of the Bankruptcy Court that the Funds were not eligible to vote on the Plan. e. Moreover, the Court found that even if the Funds were permitted to vote on the Plan, they would be bound by Meridian s classification of U.S. Bank s claim and only entitled to one collective vote on account of the Claim. The Court reasoned that a creditor may not split up a claim in a way that artificially creates or increases voting power and voting rights the original assignor did not have. -6-

7 Lehman - Overview 3 VI. Background a. Lehman filed its chapter 11 bankruptcy case on September 15, The individual members of the appointed creditors committee (the Individual Members ) each hired their own respective attorneys, separate from the professionals employed by the committee itself. b. A reorganization plan was confirmed by the bankruptcy court which contained a provision (section 6.7) allowing the payment by the estate of the reasonable professional fees and expenses incurred by the Individual Members attorneys, as Administrative Expense Claims. The Individual Members attorneys had billed approximately $26 million (the professional fees in the entire case totaled approximately $1.8 billion). The bankruptcy court held that plan section 6.7 was a permissible provision under Bankruptcy Code section 1123(b)(6) 4 in that, while the Bankruptcy Code does not expressly provide for the payment of committee members professional fees, nothing in the Bankruptcy Code forbid such payment. The bankruptcy court declined to determine whether the Individual Members professional fees could alternatively be paid under sections 503(b)(3)(D) and 503(b)(4). 5 c. The U.S. Trustee ( UST ) had objected to plan section 6.7, but agreed to defer its objection until after plan confirmation. After plan confirmation, the Individual 3 In re Lehman Brothers Holdings Inc., et al., No. 13 Civ (RJS), 2014 U.S. Dist. LEXIS (S.D.N.Y. March 31, 2014). 4 Section 1123(b)(6) provides that plans may include any appropriate provision not inconsistent with the applicable provisions of [the Bankruptcy Code]. 5 Sections 503(b)(3) and 503(b)(4) provide in part: After notice and a hearing, there shall be allowed administrative expenses, other than claims under section 502(f) of this title, including (3) the actual, necessary expenses, other than compensation and reimbursement specified in paragraph (4) of this subsection, incurred by (D) a creditor, an indenture trustee, an equity security holder, or a committee representing creditors or equity security holders other than a committee appointed under section 1102 of this title, in making a substantial contribution in a case under chapter 9 or 11 of this title; (F) a member of a committee appointed under section 1102 of this title, if such expenses are incurred in the performance of the duties of such committee; (4) reasonable compensation for professional services rendered by an attorney or an accountant of an entity whose expense is allowable under subparagraphs (A), (B), (C), (D), or (E) of paragraph (3) of this subsection, based on the time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title, and reimbursement for actual, necessary expenses incurred by such attorney or accountant. -7-

8 Members filed an application for payment of their professional fees pursuant to plan section 6.7 or, alternatively, pursuant to Bankruptcy Code sections 503(b)(3)(D) and 503(b)(4). The UST objected, arguing that the Bankruptcy Code not only did not provide for the payment of the Individual Members professional fees but also prohibited payment of such expenses. As noted, the bankruptcy court rejected such arguments. The UST filed the instant appeal. VII. Analysis a. Plan Section 6.7 Is Inconsistent With Code Section 503(b): The district court found that plan section 6.7 was invalid. Bankruptcy Code section 1123(b)(6), at a minimum, does not authorize plan provisions that override, undermine, or rewrite relevant Bankruptcy Code provisions, including section 503(b). Section 503(b) sets forth a list of categories of administrative expenses that is meant to be illustrative of the whole universe of administrative expenses ; while there can be some administrative expenses that are not listed in 503(b), they must nonetheless fall within 503(b) s interstices. While section 503(b) uses the term including, that term modifies the term administrative expenses suggesting that the list describes all administrative expenses, not merely a subset of administrative expenses. The district court reasoned that section 503(b)(3) expressly excludes professional fee expenses from the expenses that subsection authorizes. Instead, professional fee expenses are covered by section 503(b)(4), which expressly authorizes professional fee expenses only for entities that qualify for other expenses under section 503(b)(3)(A) through (E). Importantly, entities eligible for expenses under section 503(b)(3)(F) ( a member of a committee appointed under section 1102 ) are not expressly covered by section 503(b)(4). Thus, according to the district court, sections 503(b)(3) and 503(b)(4) work together to ensure full payment of professional fee expenses in situations covered by section 503(b)(3)(A) through (E), but not (F). The legislative history suggests the omission of subsection (F) from 503(b)(4) was intentional. Before 2005, section 503(b)(4) allowed professional fee expenses for all categories of section 503(b)(3), but in 2005, under BAPCPA, section 503(b)(4) was amended to exclude professional fee expenses for official committee members. Plan section 6.7 functionally pays the Individual Members professionals fees as administrative expenses under section 503(b) solely on the basis of committee membership. According to the Lehman court, [b]y name, function, and spirit, section 6.7 deals with administrative expenses under section 503(b), and thus, this plan provision impermissibly effectively rewrites 503(b) by calling for payment of an administrative expense on a basis that 503(b) pointedly omits. Section 6.7 is inconsistent with section 503(b) and therefore impermissible under section 1123(b)(6). -8-

9 b. Plan Section 6.7 Cannot Be Justified As Permissive Plan Payments: According to the Lehman court, plan section 6.7 cannot be justified as a permissive plan payment provision either. Primarily relying on In re Adelphia Commc ns Corp., 441 B.R. 6 (Bankr. S.D.N.Y. 2010) (where the court upheld a similar plan provision on the basis that the Bankruptcy Code allows for permissive nonadministrative-expense plan payments outside of section 503(b)), the committee and its members argued that a plan can provide for permissive payments to certain creditors where the debtor and creditors agree to such payments and the bankruptcy court finds them reasonable. The Lehman court rejected this argument. Reorganization plans exist to pay claims and postpetition expenses. The Individual Members professional fees cannot be treated as claims since they arose postpetition. [T]he Individual Members professional fee expenses are either administrative expenses or not, and if the latter, they cannot be paid under a plan. Further, in addition to policy reasons, neither the need for flexibility in bankruptcy cases, the consensual nature of section 6.7 [footnote omitted], nor a bankruptcy court s approval of a payment as reasonable can justify a plan provision that is merely a backdoor to administrative expenses that 503 has clearly excluded. c. Committee Members Professional Fees May Still Constitute Substantial Contribution Claims: The Lehman court rejected the UST s argument that the section 503(b) framework categorically rules out the payment of committee members professional fees as administrative expenses. This statutory framework impl[ies] nothing more than a rejection of a per se rule that official committee members should have their professional fee expenses paid ; there is no reason to think that the Bankruptcy Code would punish an entity that has made a substantial contribution [for purposes of sections 503(b)(3)(D) and 503(b)(4)] solely because it was also willing and able to serve on the official committee. As additional support for its reasoning, the court contrasted amended section 503(b) with section 503(c), which was also amended by BAPCPA and which clearly states that certain kinds of expenses cannot be paid unless certain conditions are met. Section 503(c) shows that Congress certainly knows how to specifically forbid payments of certain expenses if that was its desire. The Lehman court also explained that sections 503(b)(3)(D) and 503(b)(4) require notice and hearing in respect to any purported substantial contribution claim, and the bankruptcy court must determine that a substantial contribution has indeed been made; [a] plan provision [like section 6.7] cannot short-circuit the process by effectively deeming an entity to have made a substantial contribution. The Lehman court remanded the case to the bankruptcy court to determine whether the Individual Members professional fee expenses qualify for payment as substantial contribution claims. -9-

10 Spansion Overview 6 IV. Background a. The debtors filed their chapter 11 cases on March 1, An official creditors committee was appointed; a request for the appointment of an official equity committee was denied by the bankruptcy court. b. Subsequent to the debtors filing of their joint plan, an ad hoc committee of convertible (subordinated) noteholders (the Ad Hoc Convert Committee ) and an ad hoc committee of equity security holders (the Ad Hoc Equity Committee ) were formed. The two ad hoc committees both objected to the debtors plan on various grounds, which plan, after certain modifications, was confirmed by the bankruptcy court. c. As part of the confirmation process, the bankruptcy court fixed the debtors enterprise value as between $872 million and $944 million, which value range was determined based on certain reports submitted to the court, including a report by the Ad Hoc Convert Committee that posited a $1 billion value at the high end and a low end value that was more than $200 million greater than the debtors highest valuation. d. The Ad Hoc Convert Committee and the Ad Hoc Equity Committee each filed a motion seeking payment of the professional fees and expenses incurred by the ad hoc committees ($3.45 million in the case of the Ad Hoc Convert Committee and $1.77 million in the case of the Ad Hoc Equity Committee), based on asserted substantial contributions pursuant to sections 503(b)(3)(D) and 503(b)(4). The debtors objected to the motions. V. Analysis a. Courts have narrowly tailored the payment of asserted substantial contribution claims. The asserted contribution must result in actual and demonstrable benefit to the debtors estates and the creditors. Factors to be considered by the court include: (i) whether the services were provided to benefit the estate itself or all of the parties in the bankruptcy case, (ii) whether the services conferred a direct benefit upon the estate, (iii) whether the services were duplicative of services performed by others, (iv) whether the applicant acted primarily to serve its own interests and would have acted absent an expectation of reimbursement from the estate, and (v) whether the benefit received by the estate was incidental, arising from activities the applicant pursued to protect its own interests. b. Although the Ad Hoc Convert Committee (as well as the Ad Hoc Equity Committee) raised objections (most of which were rejected by the court) and engaged in conduct to slow down the confirmation process and gain leverage to 6 In re Spansion Inc., et al., Case No (KJC), 2014 Bankr. LEXIS 2175 (Bankr. D. Del. May 14, 2014). -10-

11 enhance recovery for its constituents, the Ad Hoc Convert Committee did contribute benefit to the estate. The Ad Hoc Convert Committee questioned the debtors valuation report and proposed its own analysis, which influenced in part the bankruptcy court s ultimate determination of enterprise value. Although the precise benefit to the estate is hard to determine, it was clear to the bankruptcy court that, without the Ad Hoc Convert Committee s valuation objections, the court might have assigned a lower enterprise value. The court granted in part the Ad Hoc Convert Committee s motion and ordered the parties to confer to see if they could agree that $228,000 (the amount claimed by the Ad Hoc Convert Committee to have been incurred in connection with the enterprise valuation related services) was the appropriate amount to be awarded. c. In contrast, the Ad Hoc Equity Committee s asserted valuation played virtually no role in the court s determination. Thus, in the court s view, the Ad Hoc Equity Committee did not make a substantial contribution to the case. Moreover, this ad hoc committee s actions were almost completely duplicative of the Ad Hoc Convert Committee s efforts. Consequently, the court denied the Ad Hoc Equity Committee s motion. -11-

12 MAKE-WHOLE PROVISIONS I. Background A. Terminology: Pre-payment fees, pre-payment penalties, pre-payment premiums or yield maintenance provisions. B. Distinctions from No-Call Provisions: Loan documents prohibition on prepayments; amount and damages upon breach less clear. C. Types of calculations: 1. Set amount or flat/fixed fee 2. Formula-based calculation II. Triggering A. Prepetition and automatic acceleration B. Postpetition III. Summary of Law A. No definitive general rule regarding enforceability. B. Drafting, contract interpretation and application of relevant state law are determinative. IV. Brief Survey of Recent Cases A. In re Solutia, Inc., 378 B.R. 473 (Bankr. S.D.N.Y. 2007) B. In re Calpine Corp., 365 B.R. 392 (Bankr. S.D.N.Y. 2007), aff d In re Calpine Corp., 2010 W.L (Bankr. S.D.N.Y. 2010) C. In re Premier Entertainment Biloxi, LLC, 445 B.R. 582 (Bankr.S.D. Miss. 2010) D. In re Chemtura Corp., 439 B.R. 561 (Bankr. S.D.N.Y. 2010) E. In re Petroleum & Franchise Funding, LLC v. Dhaliwal, 688 F. Supp.2d 844 (ED. Wise. 2010) -12-

13 E. In re South Side House, LLC, 451 B.R. 248 (Bankr. E.D.N.Y. 2011) F. In re School Specialty, Inc., 2013 W.L (Bankr. D. Del. April 22, 2013) G. In re GMX Resources, Bankr. No , (Bankr. W.D. Okla., August 27, 2013) (oral decision) H. In re AMR Corp., 730 F.3d 88 (Cir. 2013) I. In re Bank of New York Mellon v. GC Merchandise Mark (In re Denver Merchandise Mark, Inc.), 740 F. 3d 1057 (5 th Cir. 2014) -13-